Rating philosophy and dynamic properties of internal rating systems: A general framework and an application to backtesting
AbstractThe paper draws a general framework for asset and default dynamics, separating the influence of the economic cycle into a component which is embedded in the rating system and an unobservable risk factor that determines the movements of defaults around the ex ante estimated PDs. The two components – the sensitivity of ratings to credit cycle and conditional asset correlation - can be quantified through a Maximum Likelihood approach, giving a measure of the cyclicality of the rating system, and allowing for a number of applications: among those the modified binomial test proposed here.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 14711.
Date of creation: 23 Jan 2009
Date of revision:
rating philosophy; rating dynamics; cyclicality; asset correlation; migration matrices; ML estimation; backtesting; binomial test;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-25 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Dirk Tasche, 2006. "Validation of internal rating systems and PD estimates," Papers physics/0606071, arXiv.org.
- Sokolov, Yuri, 2010. "Business cycle effects on portfolio credit risk: A simple FX Adjustment for a factor model," MPRA Paper 27222, University Library of Munich, Germany.
- Michael Kalkbrener & Akwum Onwunta, 2009. "Validating Structural Credit Portfolio Models," Working Papers, COMISEF 014, COMISEF.
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